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Topic: Investment Banking - All Gains No pains

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deveshkayal
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Posted: 15/Feb/2007 at 8:13pm

Merger mania takes i-banks to a new high

During January and February so far, investment banking houses have earned more than $200 million in fees from deals involving Indian corporates. In an era of obscene bonuses, this may not be a big figure. But spot the dramatic jump in the number: in calendar 2006, fees generated from such `Indian deals’ was only $150 million. Thus i-banking fees for M&A transactions accrued during the last one month alone have surpassed the total fee earned during the entire 2006.

Technically, I-banks will book these fees after all transactions are closed, which may include financing and equity transactions. According to estimates by senior bankers, total fee raked in during 2006, including equity and debt capital for India, was around $500 million. “Of the $500 million, equity capital markets could have contributed around 60% while around 10% could be the debt capital market fees,” said sources. The M&A transactions have contributed the balance $150 million. Equity and capital market deals entail issuance of shares and bonds by companies to raise money.

For multi-billion deals above $10 billion, advisory fees vary from 0.1% to 0.2% of the deal size or anywhere between $10-25 million. Global i-banks charge a minimum of $1 million. For small-sized deals, the fee could be as high as 3.5% of the deal size. With corporates looking at big-ticket deals which require large syndication ability of banks, a commitment fee is now being levied. This would ensure a minimum payment to i-banks from the deal, even if the corporate eventually loses out in the bidding battle. For instance, Essar group has paid Citi $25 million for the Hutch deal even though they lost the deal.

As deals turn complex, i-banks have also started levying ‘drop dead’ fee or non-refundable fee in case of failed transactions. This is simply to compensate for their time and effort. The bigger chunk of the fee collected by i-banks are garnered from financing and structuring the deal. This fee could range anywhere between 0.50% and 1.25% of the deal size. “If there is an equity transaction, deal fees are higher,” say i-bankers.

The last 15 days saw three major deals being announced - Tata Steel’s acquisition of Corus at $12 bn, Vodafone acquisition of Hutchison Essar at $11.1 bn and Hindalco’s bid for Novelis at $6 bn. Some of the other $1bn-plus deals in the pipeline include Suzlon’s RE power and Tata Power’s bid on Bumi Resources of Indonesia.

In most of the recently announced deals, European banks have been the lead advisors. In case of Tata Steel, it was ABN Amro, Deutsche Bank and Rothschild, while in case of both Vodafone and Hindalco, UBS was the sole advisor. This is because Europe has been the destination for the maximum number of acquisitions by Indian corporates.

“The M&A game has entered a new phase where i-banks are required to provide end-to-end solutions from idea generation to providing balance sheet support,” said Frank Hancock, managing director, Corporate - Finance India, ABN Amro.

According to Manisha Girotra, managing director and chairperson, UBS Securities, patrons of investment banking services in India have become very sophisticated. “I-Banks not only have to differentiate themselves by bringing ideas and opportunities to corporates but also need to provide balance sheet support.

Corporates know which investment banks to use for cross-border transactions, IPOs and other issues. It’s important for investment banks to become a one-stop shop. Banks need to integrate advisory with funding,” she said. Compare this with the i-banking fees in China, estimated at around $1.5 bn for 2006. However, most of the fees in China came from equity market transactions like initial public offers.

"You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beat the guy with a 130 IQ. Rationality is essential"- Warren Buffett

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PrashantS
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Posted: 15/Feb/2007 at 9:29pm

What are the effects of reverse merger?

I am interestd in I bank on the sell side.
>and on Suzlon i think may really be a strategic move .It is so amazing that these M&A's could create so much wealth for I bankers .I beleive this activity will really increase in India in a few years.It is good for companies but imagine the condition of employees.But are M&A's good or bad. Imagine a company A buying B. Majority of the time the employees of smaller company loose their job or have to put up with the employees of the company which bought them.(Again this is what i have heard,not an expert at this)I bet they dont get along easily.There is this great movie "In good company" . Watch it ...You will know what i am talking about.

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xbox
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Posted: 15/Feb/2007 at 5:00am

Well as I said it before the best part of KMB demerger is i-banking entity. Guys YES Bank is also making foot in this space. Already made few deals for suzlon etc. Interesting space ....well said no pain all gain.

Don't bet on pig after all bull & bear in circle.

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deveshkayal
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Posted: 18/Feb/2007 at 9:22am

M&As set to cross $100bn mark.Investment bankers see more deals as India Inc discovers new vistas across the world (Source: HT). Why is only one investment banking player listed,there should be more,DSP,UBS all should list their indian unit.

"You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beat the guy with a 130 IQ. Rationality is essential"- Warren Buffett

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basant
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Posted: 18/Feb/2007 at 11:59am

Vipulji and OmShivaya seem to know more about Yes Bank then Rana ji!!! WOnder how much a concentrated portfolio helps investors in acquiring knowledge about the underlying company.

'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in

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PrashantS
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Posted: 19/Feb/2007 at 12:58pm

Yes Bank is really very agressive Basantji ..and this is my personal experince ..the agent wants me to open and account and he is so polite and calls me up every second day

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deveshkayal
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Posted: 22/Feb/2007 at 2:53pm

JM to become full fledged investment bank

JM Financial and Morgan Stanley will be parting ways. CNBC-TV18 had reported on the split a few months back in August 2006.

In accordance to this, Chairman of JM Morgan Stanley, Nimesh Kampani informs that JM Financial will buying the investment banking business with BV of USD 20 million from Morgan Stanley. Also, Morgan Stanley will apply for merchant banking licence and JM will become a full fledged investment bank.

He further adds that they will continue focus on NBFC, asset management and capital markets. Kampani informs that they will heavily invest in wealth management.

Excerpts of CNBC-TV18's exclusive interview with Nimesh Kampani:

Q: What is the plan and the nature of the agreement with Morgan Stanley in terms of where the people go and what you would do versus Morgan Stanley in India from hereon?

A: We have two joint ventures with Morgan Stanley at present, which is JM Morgan Stanley, which is an investment bank and JM Morgan Stanley Securities, which is instituonal securities and research.

Investment bank has also two subsidiaries, which has a retail brokerage business and also the fixed income brokerage income business. We have parted the company with Morgan Stanley and we are buying Investment Bank at a book value, which is about USD 20 million. This means we will pay for 49%, USD 20 million to Morgan Stanley. We are selling the securities business, 49% which we own at Morgan Stanley at USD 445 million. This will make Morgan Stanley 100% owner of the securities business and we will become 100% owner of investment banking business. So Morgan Stanley will then apply for the merchant-banking license and will become full-fledge investment bank and we will start insurance security business and research and will become a full-fledge investment bank.

Our advantage is like this - we already have retail business, so we already have a platform of securities business where we will do business with HNI, corporate etc.. We just have to add on to securities business and that’s what we will do along with the research. So we have parted company with Morgan Stanley, we got a price for which our shareholders should be happy and we will continue to focus on non-banking financial -NBFC, we will continue to focus on our asset management business, we will do all the business of advisory, M&A, capital market transactions. So we will continue all of the full-fledged investment banking business on our own.

Q: Your shareholders would want to know what you would do with the nearly Rs 2,000 cr of cash you are getting for the sale of the 49% stake. How do you plan to utilize this cash?

A: We will focus on some of the new businesses in the financial services area. We will consider that and our board will decide an appropriate time what we want to do on that. But we would like to first focus on our institutional securities business, our non-banking finance business and ultimately investment business. We are going to start a special situation fund where there will be substantial focus on investment management, investment banking and wealth management.

We also have an option to consider various other things whether to grow any other financial services business, which will come back in about a month’s time with our complete reason on that business.

Q: Could you talk a bit about how the brokerage business has been valued with the price that you have got at USD 445 million?

A: The brokerage business has been valued on a basis, which were negotiated deals. I do not want to discuss how the valuation was done because it’s not right for me to do that. But roughly, the profits of the securities business, which was consolidated with the JM Financial balance sheet, was about 52-55% and investment banking was about 45%. So that’s the way the split of the business was there.

Those businesses, which we have sold is roughly the profits are of about 55% and about 45% of profit we have bought it at a book value. So if you look at it, the securities business is roughly valued at two times Rs 445 million, which is over little less than USD 900 million. The investment banking business, which we bought at a book value and the profit contribution was about 45%. So you can take a guess for what valuation could then investment banking be if we got it actually at a book value - that’s the way we have look at it.

Q: What are the modalities of the agreement in terms of whether there is a non-compete clause in any arm of the business and what happens to the people’s strength that JM and Morgan had together?

A: Whatever people are there in investment banking will remain with us and there will be a two-year clause of non-poaching of the people between the two parties. So we will not poach people from insurance securities business and they will not poach people from our businesses. For two years, that’s what we will continue.

As far as non-compete is concerned there is no non-compete; once Morgan Stanley will get an investment-banking license from SEBI, they can compete with us. We have no problem on that because we will be competing, not only with Morgan Stanley but also with Merrill Lynch, Goldman Sachs and Lehman Brothers.

Q: The securities business accounted for a large share of your overall revenues. How long do you think it will take for you and do you think you will be successfully able to build an institutional securities business without Morgan Stanley?

A: For the institutional securities business, naturally the foreign firm is a greater advantage because of its worldwide distribution. We will focus ourselves on the basis that we are domestic investment house. Every country in the world has a good strong domestic investment bank. If you look at Macquarie Bank in Australia, they are a strong investment bank in Australia. So what we are looking at is that there are a large number of FII and hedge fund investors and we will focus on them.

We will give them great and innovative ideas and we are confident of getting those businesses from them. It will take about another six months time to set-up the institutional platform and we are going to do it, very clearly. It's not that we will not get a business, we may not have a very high market share on that, but we are confident of getting those businesses from FIIs and also hedge funds.

Q: We saw this deal coming three months back. Why were you so vehement in your denial three months back when we first reported this story, if it was going to happen just three months down the line?

A: Nothing was decided at that time, so how can I say that I have done it. When I do a deal, I will tell you. I was not a seller that’s very clear. Therefore, when we are not a seller of my business, I have acquired the business from Morgan Stanley.

Q: You have also sold your stake in the securities business, which is the larger business?

A: That is sold mainly because Morgan Staley was controlling that business and also I have to give my partner a good platform, It is no use buying everything and they become zero to start with.

Edited by deveshkayal - 22/Feb/2007 at 2:55pm

"You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beat the guy with a 130 IQ. Rationality is essential"- Warren Buffett

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deveshkayal
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Posted: 25/Feb/2007 at 2:35pm

Originally posted by PrashantS

What are the effects of reverse merger?

Prashant, i dont know whether the following answers your question or not but u can definitely check this book.

---------------------------------------------------------------------------------------------

There are more ways to go public than through the traditional IPO (initial public offering). "The two most popular alternatives to IPOs are reverse mergers and self-filings," write David N. Feldman and Steven Dresner in Reverse Mergers, from Bloomberg

Reverse merger examples that the book's dust jacket speaks of include Berkshire Hathaway, Turner Broadcasting System, Texas Instruments, and New York Stock Exchange

Closer home, we have the prominent example of ICICI that reverse merged with ICICI Bank in 2002 to set a trend for the conversion of all-India financial institutions into universal banks.

Purchasing Control

What happens in a reverse merger? "A private company merges into a public one," explains the intro. "The private company purchases control of a public one, merges into it, and when the merger is complete becomes a publicly traded company in its own right." Where the public company has minimal operations, it is called a shell.

"The public company may be the remnant of a bankrupt or sold organisation or specially formed for the purpose of investing in a private company."

Reverse mergers have a chequered past, note the authors. "In the early days of the practice — the 1970s and 1980s — a number of unsavoury players used the technique fraudulently... Some shady dealers would form new public shells, raise money from investors, and then take that money in the form of `fees', salaries, and perks in exchange for `running' the shell. In many cases, these shells were simply milked for the cash they had until it was gone." Another malpractice was to manipulate stock prices by leaking false information into the marketplace

The book discusses the many advantages of reverse mergers — such as lower cost, speedier process, less dilution, and doing away with underwriting

"Most reverse mergers can be completed for under $1 million (this includes the cost of acquiring the public shell). Total costs can be much less than $1 million, depending on the cost of the shell and whether or not the private company has already completed proper audits of its financial statements."

Underground Economy

A shell is a company that exists in name only and which has ceased to trade, defines www.finance-glossary.com. "Shell companies are at their most interesting when they are listed on a stock exchange, because they provide a cheap way for another company to acquire a listing by `reversing' into the shell.

Rumours perpetually surround listed shells, and their share prices can be quite volatile as investors get excited at the prospect of a reversal." Take care, therefore

According to the US Securities and Exchange Commission (SEC) shell company is one with `no or nominal operations, and with no or nominal assets or assets consisting solely of cash and cash equivalents.' Shell corporations are not in themselves illegal, and they may have legitimate business purposes, clarifies Wikipedia

"However, they are a main component of underground economy, especially those based in tax havens. They may also be known as International Business Corporations (IBCs), Personal Investment Companies (PICs), front companies, or `mailbox' companies."

A chapter in the book, on `shells and deal structures', discusses `reverse triangular merger' and `reverse stock splits'. In the former, the public shell creates `an empty, wholly owned subsidiary', which then merges into the private company. And the latter becomes necessary when in the process of completing a reverse merger, a public shell finds itself with `too many issued and outstanding shares and not enough authorised shares'.

The last three to five years have seen growth in reverse mergers, say the authors. Companies outside the US see reverse mergers as an opportunity to access US capital markets

"Deals continue to come to the US from Israel, Hungary, the UK, Korea, Germany and other countries... " A book that takes your knowledge of `reverse' forward.

Source: BL

"You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beat the guy with a 130 IQ. Rationality is essential"- Warren Buffett

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